Whole Foods Case Business & Marketing Coursework Paper

Answer the Case Questions

Whole Food Case QUESTIONS: 1. How did Whole Foods Market differentiate itself from other supermarket chains? How did Whole Foods differentiate itself in terms of its product range? How did Whole Foods Market differentiate its stores from the way other supermarkets look? What were some of the softer touches used to differentiate Whole Foods? 2. Which factors help explain why the differentiation of Whole Foods has eroded? Why could the party not go on forever? In fact, why did the party go on for so long? Why was Whole Foods Market able to grow and prosper for decades without serious large-scale competition for a long time? 3. Which moves is Whole Foods Market under pressure to adopt from certain shareholder groups? Do you think that becoming more like a regular supermarket chain is a good idea for Whole Foods? Or does Whole Foods Market need to remain different at all costs? 4. With many other supermarkets also offering organic food, how can Whole Foods Market continue to differentiate itself so as to justify its higher prices? Or does Whole Foods Market actually have to stop differentiating itself and simply try to reduce its cost structure and lower prices? Whole Foods Wanted to Be More Than a Supermarket, and Therein Lies the Problem By Heather Haddon and Annie Gasparro John Mackey won the battle for America's taste buds, but his victory is proving costly. As co-founder of Whole Foods Market Inc., the 63-year-old Texan helped reshape how Americans approach eating, transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. Whole Foods became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie celebrity. Now competition has caught up to Whole Foods, and Mr. Mackey is being forced to try conventional grocery-store pricing and other supermarket tactics to reverse his company's flagging fortunes. The pressure ratcheted up with the disclosure in a securities filing Monday that activist investor Jana Partners LLC and several allies had amassed an 8.8% stake in Whole Foods and want the company to accelerate its overhaul and explore a possible sale. Jana said in its filing it wants Whole Foods to more quickly adopt standard grocery-industry practices it long had eschewed: loyalty cards that would allow it to target shoppers with coupons based on their buying habits; centralizing product purchasing to improve efficiency; and advertising sales and discounts. "We are confident in the actions we are taking to position the company for continued success," Mr. Mackey said in a written statement Tuesday, "and we remain open to ideas to create further value for our shareholders and all our stakeholders." Whole Foods owned the natural and organic market for years, so Mr. Mackey was able to charge premium prices and didn't need much promotion. "When you average 8% same-store sales [growth] for 35 years, it can breed a sense of, 'Why do we need to change? Things are working,'" Mr. Mackey said in a recent interview with The Wall Street Journal. Other grocers, however, got into the organics game at lower prices. Over the last 18 months, Whole Foods, which now counts 462 stores, notched its longest stretch of quarterly same-store sales declines since going public in 1992. It is down as many as 14 million customer visits over the past six quarters, according to Barclays PLC. Its shares have lost nearly half their value since peaking in 2013. Today, warehouse-club retailer Costco Wholesale Corp. says it sells more organic food than any other retailer. In its last fiscal year, Kroger Co., the nation's largest conventional supermarket chain, reported natural and organic sales that surpassed all of Whole Foods' revenue for the year. "More conventional supermarkets are copying us," says Mr. Mackey. "Every place we went bred the Midas touch. But it also bred envy." The U.S. grocery industry as a whole is mired in one of the most challenging financial stretches in decades. With more places to shop for food, consumers feel less loyal to their local stores. Amazon.com has gotten into the grocery business, and European deep-discount food retailers Lidl Stiftung & Co. and Aldi Sued are expected to expand in the U.S. this year. The longest slump since 1950 in the price of food commodities such as eggs, meat and dairy has sparked a price war, eating into grocers' razor-thin margins. Operating profits for grocery stores declined by about 5% last year, according to Moody's Investors Service. Stocks of food retailers are down 6.3% this year. Whole Foods' shares, which rose 10% on Monday when Jana disclosed its stake, are now up 9% this year. Mr. Mackey, a strict vegan who favors jeans, fleece jackets and athletic shoes, started in the business when he was only 25. He scraped together $45,000 to open Safer Way Natural Foods in a Victorian home in Austin, Texas, in 1978, after drifting in and out of college for six years without graduating. He lived in a house with a vegetarian co-op. A friend from that time recalled nothing but tofu in his refrigerator. In 1980, in partnership with two other local health-food-store owners, he opened the first Whole Foods Market in Austin. The store was large for its time, and the company expanded quickly. During the 1990s and 2000s, it acquired 11 regional health-food chains. "He was so much more financially sophisticated than everyone in our world," says Doug Greene, founder of New Hope Natural Media, which hosts natural-products trade shows. "John was talking about investment bankers and share prices when we were all talking about, 'Gee, do you think we can get a small business loan?'" Mr. Mackey allowed his company's 11 different regions to act nearly independently, fueling local creativity. "He said, 'We can't figure out Florida. You will run Florida for us and show us how to do it,'" recalls Richie Gerber, who sold his Bread of Life Natural Foods Markets chain to Whole Foods in 1997. In 2010, Mr. Mackey began sharing the CEO role with Walter Robb. Their chain earned a cachet that health food hadn't had before. It became known for healthier eating and unique, upscale ingredients. It sold organic chia seeds in one aisle, and in another, smoked chicken sausage on toast paired with wine chosen by a master sommelier. Last year, Whole Foods' prepared foods and bakery sales hit $3 billion. "It still is the default if you want to go to a supermarket and think what you find will be good," says food writer Mark Bittman, whom Jana has retained as a consultant as part of its investment initiative. Mr. Mackey instituted animal-welfare standards and maintained a strict and lengthy list of ingredients he won't allow in his stores, such as the Red 40 food dye and the artificial sweetener aspartame. As the company opened new stores and acquired other retailers, annual sales grew sixfold between 1995 to 2005, then more than tripled over the next decade, corporate filings indicate. Mr. Mackey bought homes in Austin and Boulder and took friends on an all-vegan catamaran trip in the Caribbean. In 2007, saying he no longer felt the need to work for money, he voluntarily began drawing a $1 annual salary. As of December, he held 980,000 shares of company stock, worth about $33 million. He routinely flies coach. His political opinions have drawn social-media criticism from some customers. He is against government health-insurance mandates and he believes society will be able to manage climate change. In 2007, when Whole Foods was trying to acquire Wild Oats Markets Inc., federal regulators revealed that Mr. Mackey had written hundreds of anonymous posts on Yahoo Finance message boards championing his own company's stock and criticizing rival Wild Oats Markets. Regulators cited the posts as proof that Wild Oats was a top competitor and a merger would violate antitrust laws. (The Securities and Exchange Commission found no wrongdoing.) Mr. Mackey apologized for the posts and Whole Foods completed the acquisition in 2009 after agreeing to sell some Wild Oats assets. In 2015, its image with customers took a hit when the New York City Department of Consumer Affairs accused it of overcharging customers in nine stores by putting incorrect weights on some items. A far bigger problem, however, was that conventional grocers had begun carrying specialty products that once were exclusive to Whole Foods -- at cheaper prices -- and offering their own high-end salad bars and beer halls. At the same time, specialty grocers such as Sprouts Farmers Market Inc. and Trader Joe's expanded and siphoned off customers. Certain health-food makers began stocking their products in other stores. "We take opportunities as they come, and right now, those opportunities seem to be more at the conventional stores," says Matt Oscamou, founder of Frontier Snacks, Inc. Frontier is taking his latest granola to supermarkets such as Kroger instead of Whole Foods because they are offering better shelf space. As its sales softened, Whole Foods began lowering prices. In September 2015, it announced it would cut 1,500 workers. Still, in the fiscal year ending last September, its profit declined by more than 5% and its comparable-store sales -- a key retailer metric -- fell 2.5%. "They failed to recognize that as the category matures, price becomes more important," says UBS analyst Michael Lasser. Customers jokingly called the store "Whole Paycheck." Pricing had been the subject of tense debate among senior managers for years, according to people familiar with their thinking. Steps to lower prices and offer discounts have eaten into profit margins, but Whole Foods is still more expensive than its largest competitors, analysts say. "I would shop here for everything except for the price," said Cathy Price, a 45-year-old mother of two, during a recent visit to a Chicago Whole Foods. She returned some green peppers to the shelf, she said, because they were too expensive. Last fall, as the problems worsened, Mr. Mackey and Mr. Robb began discussing ending their unusual dual-CEO structure. Mr. Mackey said the company needed a clearer line of reporting. Both men discussed becoming the sole CEO. Mr. Mackey, who for years had focused on the company's long-term mission and his vision for the brand, said he wasn't ready to step aside. "I feel like I'm madly in love with Whole Foods Market right now," says Mr. Mackey. Some industry executives and analysts say Mr. Robb has more experience running day-to-day operations, and they question whether Mr. Mackey is up to the job. Mr. Robb, who remains a board member, didn't respond to a request for comment. Mr. Mackey says various senior executives run Whole Foods' operations, including former Target Corp. executive Don Clark, who is overhauling the company's global purchasing to run more like a traditional retailer. As part of what Mr. Mackey calls a "transformation phase," Whole Foods formulated a ninepoint plan to cut costs and focus on its most loyal customers, a concession that it can't cater to all markets or demographics.